Bond Market Relief: Yields Fall as Central Banks Weigh Inflation and Policy
Market Overview and Central Bank Actions
A look at the day ahead in European and global markets from Rocky Swift
Bond Market Movements
Battered bond markets licked their wounds on Thursday, with yields in the U.S. and Japan edging lower, but little has changed to improve the overall picture for debt investors.
Impact of Oil Prices and Inflation
Oil prices remain above $90 a barrel as the U.S. and Iran escalated strikes against each other, fanning inflation fears that have pressured central banks to tighten monetary policy.
Federal Reserve Rate Hike Expectations
Markets have dialled up the probability that the Federal Reserve will deliver a 25-basis-point rate hike this month to about 67% from 37% odds a week ago, according to CME Group's FedWatch tool.
Fed Officials' Commentary
Federal Reserve Bank of New York President John Williams tempered those expectations slightly on Wednesday, saying that rising long-term bond yields are a reflection of a solid economy and that he wanted to see more data before deciding on rates.
Upcoming U.S. Economic Data
Speaking of data, ADP labour figures on Wednesday came in below expectations, but Friday brings the more reliable and closely watched monthly report on U.S. nonfarm payrolls. Following that, the next major data point will be consumer price index figures on September 11.
Fed Governor Waller's Upcoming Speech
Next on the Fed docket is Governor Christopher Waller, who is due to speak at a Reuters NEXT event at 1230 GMT on Thursday in Washington. He said in July that higher rates may be needed in the near term.
European Central Bank and Bank of Japan Developments
The European Central Bank and the Bank of Japan have their own inflation concerns. Data on Thursday showed Japan's services sector expanded at its fastest pace in five months in August, adding to evidence the economy is robust enough to handle a BOJ rate hike.
Yen Strength and JGB Auction
That may be helping the long-suffering yen, which rose to a three-week high, adding to a surge on Wednesday that raised suspicions of a rate check by Japan's central bank.
Japanese government bonds, which have been at the centre of recent ructions in debt markets, got a measure of relief after an auction of 30-year securities showed decent demand. Benchmark 10-year JGB yields retreated from a 30-year peak of 3.015% touched on Wednesday.
Corporate and Equity Market Updates
Broadcom's AI Chip Sales Outlook
In the corporate sector, Broadcom said after the bell on Wednesday that it expected strong AI chip sales for the next two years. Even so, the company's shares fell more than 3% at one point in extended trading.
Equity Futures Performance
Equity futures pointed to slight gains in Europe and the U.S. The pan-region Euro Stoxx 50 futures were up 0.03% at 6,373 while S&P 500 e-minis were up 0.07% at 7,682.8.
Key Market Events to Watch
Key developments that could influence markets on Thursday:
- Bond auctions: France reopening of 10-year, 14-year and 20-year sales; UK reopening of 23-year sale
- S&P PMI data for France, Germany, euro zone, UK
- Euro zone producer price data for July
(Editing by Jamie Freed)
